Thailand: Pausing to mourn, but ready to rise Asia Pacific Economic Outlook, Q2 2017

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The recent demise of Thailand's much-revered monarch weighed on consumer spending in the last quarter of 2016. But any slowdown in GDP growth is likely to be temporary, and the economy is likely to bounce back in the first quarter of 2017.

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Asia's retail spending boom

In February 2017, the Bank of Thailand (BOT) kept its key policy rate—the one-day repurchase rate—unchanged at 1.5 percent, continuing with its accommodative monetary policy. The BOT had last changed rates in April 2015, when it cut the policy rate by 25 basis points to the present level. The bank’s February rate move did not come as a surprise, given the need to aid economic growth with inflation within the central bank’s target range of 1.0–4.0 percent. Key indicators covering both consumers and businesses point to a possible slowdown in overall economic activity in Q4 2016, partly due to the subdued sentiment following the demise of the much-revered monarch, King Bhumibol Adulyadej in October. Any slowdown in GDP growth last quarter is, however, likely to be only temporary, with the economy likely to bounce back in the first quarter of 2017.

Consumer spending subdued

The king’s passing away and the subsequent period of mourning weighed on consumer spending in the last quarter of 2016. Passenger car sales volumes, for example, fell by 10.6 percent year over year in Q4, reversing strong gains in the previous quarter (10.6 percent). Similarly, retail sales, which had slowed in Q3, fell by 2.0 percent in October before recovering in November. Consumer confidence was also affected, declining in October and November before edging up slightly in the next two months.1 The figure, however, is still below 100, which implies more pessimism than optimism.

These indicators point to a possible slowing of private consumption in Q4. In the prior quarter, private consumption grew by a healthy 3.5 percent, continuing from a strong 3.8 percent rise in Q2—the highest in three years. The situation is, however, expected to improve in Q1 2017, given healthy consumer fundamentals. For example, the labor market remains strong with unemployment remaining low and growth in monthly wages in the private sector going up in Q4 2016 (figure 1).2 Consumers also seem relatively more upbeat about their future compared to the present.3

The labor market continues to remain strong, while private sector wages have gone up

Businesses don’t fare any better

Businesses did not fare any better in Q4 2016. Capacity utilization (seasonally adjusted) in industry was 66.3 percent, much lower than the highs of 2012–13. Industrial production picked up pace in November, only to weaken in December. Sentiment in industry also remains pessimistic, although the figure appears to be edging up since August 2016.4 Businesses in the tourism sector have been affected by weak tourist arrivals, which fell in November (-3.7 percent year over year), before picking up partially in December (2.4 percent). It’s not all gloomy news, however, with businesses likely to be encouraged by a recovery in exports in Q4. Exports, valued in US dollars, grew 3.6 percent year over year in Q4, the second such quarter of growth in the last two years. Also, similar to consumer sentiment, businesses appear more optimistic about the future.5 This augurs well for the economy, especially for investments, given that gross fixed capital formation has slowed over the past year.

Capacity utilization is low relative to 2012–13, so is industrial production

BOT keeps its focus

An area of concern for the BOT is slow credit growth, although there was a mild uptick in Q3 2016 (figure 3). Slowing credit, could however, be a welcome pause for households, given high household debt. During 2008–16, the ratio of total financial liabilities of households to disposable personal income is estimated to have increased by a staggering 53.5 percentage points to 143.9 percent.6 The BOT will also likely keep an eye on rising non-performing loans (NPLs), which went up by 14.3 percent to THB 385.7 billion (US$ 10.9 billion) in 2016 with gross NPLs as a share of total loans edging up to 2.8 percent during the year. Policymakers will likely focus on the sectoral distribution of NPLs—sectors like commerce, private consumption, and manufacturing are the most affected (figure 4).

Credit growth has slowed in recent quarters

The share of commerce in NPLs has gone up over the past two years

The central bank, however, has many things going in its favor. Inflation, at 1.6 percent in January, is still well within the BOT’s target rate. Core inflation has been stable at 0.7–0.8 percent in the last eight months with much of the push on headline inflation coming from energy prices (figure 5). Also, key banking parameters have either improved or stabilized. For example, regulatory capital to risk-weighted assets has increased since Q1 2015 and is now at 18.2 percent.7 Return on assets for the banking sector appears to have stabilized at 1.4 percent after declining steadily between Q3 2014 and Q4 2015.8 Finally, a housing bubble appears unlikely with house prices slowing from the fast-paced growth of 2012–14.

Rising energy prices have pushed up headline inflation, while core inflation remains stable

Fiscal push likely if external concerns rise

While an accommodative monetary policy is helpful for the economy and keeps debt servicing costs in check, especially for households saddled with large debt, the scenario may change if the United States Federal Reserve pursues a more aggressive rate hike path than initially assumed.9 A casualty of this could be the Thai baht, which stabilized last year after steadily losing ground to the greenback since 2013. Any sharp currency depreciation due to a rising interest rate differential with the United States along with a sharper-than-expected rise in global energy prices, could impact headline inflation in Thailand, thereby queering the pitch for the BOT. It is likely, then, that the onus of economic growth will fall more on the fiscal side. With elections due in a year and fiscal accounts relatively healthy, the government will only be happy to oblige.